How variety could be the spice of long-term investing
Investors could rarely achieve their investment goals by focusing on just one asset. Find out why.
You may have come across the acronyms, “ABS” and “MBS”, and wonder if they may be describing alphabet soup.
They are non-traditional, interest-bearing debt securities created from the pooling of:
So why do some fund managers choose to invest in securitised debt1, 2, and what are the roles ABS and MBS could play in an investment portfolio?
1. Diversified income sources and risks
When seeking yield3 in periods of market stress, securitised debt such as ABS and MBS could help diversify income sources and risks. Agency MBS, for example, have exhibited uncorrelated returns to risk assets such as developed market equities and US credit or corporate bonds, and could act as a hedge to portfolios.
Still, securitised assets of all kinds were marked down earlier this year as a result of forced liquidations of leveraged investors in the space, and thus did not provide the diversification we would have expected. The various liquidity support programmes put in place by the US Federal Reserve and other central banks have gradually calmed the markets, and securitised assets such as MBS have been delivering positive performance in recent months4,5.
Diversifier in times of market stress5
Unlike equities and corporate bonds, which are more closely tied to corporate balance sheets, securitised debt’s underlying assets are mostly loans extended to individuals - this means tapping into the balance sheets of consumers. And they are largely supported by trends in US consumption strength and declining household debt6.
2. Resilience in market downturns
Securitised debt also demonstrated resilience4 in market downturns. During periods when the S&P 500 Index delivered negative returns of more than 5%, ABS, non-agency commercial MBS and non-agency residential MBS have demonstrated more resilience compared to equities and high-yield (HY) corporate bonds7.
An allocation to non-agency mortgages could help manage portfolio volatility.
Returns8* during periods of S&P 500 drawdown (> -5.0%)
3. Relatively consistent returns4
Historically, securitised debt have broadly generated relatively consistent returns. Agency securitised debt, for example, are issued or guaranteed by US government-related bodies. They demonstrate defensive characteristics and could be considered as an alternative to US Treasuries. With opportunities for relatively attractive yield versus US Treasuries, US MBS have demonstrated lower volatility4.
Volatility of US MBS and Treasuries9
In uncertain markets, building portfolio resilience helps navigate changing market conditions. With relatively low correlation to risk assets, securitised debt could help diversify income sources and risks in the search for yield3.